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Credit card companies not liable for copyright infringers’ acts

In the 1940s, Jehovah’s Witnesses, tenaciously litigious in defense of free expression, generated a half-dozen Supreme Court decisions that came to define First Amendment rights in the Twentieth Century. With comparable persistence, erotic photo publisher Perfect 10 has fought a series of battles that may delineate the scope of secondary liability in the online kingdom. In July, Perfect 10 lost the third Ninth Circuit case this year in which it sought to make others responsible for direct copyright infringement and other wrongs committed by pornographic internet services. Perfect 10 v. Visa International, 2007 U.S. App. Lexis 15824 (July 3, 2007).

In the Visa case, a divided panel held that processing payments for infringing website services was too remote from the direct copyright infringements for Visa and the other credit card companies (collectively “Visa”) to be held contributorily or vicariously liable.

The first of the Perfect 10 trilogy, Perfect 10 v. CCBill, 481 F.3d 751 (9th Cir. 2007), was brought against companies that provide web hosting and online credit card processing services to internet enterprises that directly infringed Perfect 10’s copyrights. In March, the Ninth Circuit held that Perfect 10’s state law claims were preempted by Section 230 of the Communications Decency Act, determined that Perfect 10’s Digital Millennium Copyright Act infringement notices were insufficient to require the defendants to take down allegedly infringing matter, and remanded for further consideration the defendants’ entitlement to the DMCA’s safe harbors. In May, another Ninth Circuit panel rejected most of the theories whereby Perfect 10 sought to hold Google liable for providing visual search engine services that facilitated locating and accessing infringing sites. Perfect 10 v. Amazon, 487 F.3d 701 (9th Cir. 2007).

In Perfect 10 v. Visa, the district court dismissed for failure to state a claim, holding inter alia that Visa was not contributorily or vicariously liable under copyright law. The same panel of the Ninth Circuit as in CCBill affirmed. For contributory infringement, the defendant must (1) have knowledge of an underlying direct infringement, and (2) materially contribute to it. Reviewing de novo, Circuit Judges Smith and Reinhardt held that Visa’s activities did not materially contribute to infringement because facilitating payment bears “no direct connection to [the] infringement.”

In Perfect 10 v. Amazon, the Ninth Circuit held Google’s search engine materially contributed to infringement because it assisted in locating and accessing infringing images by providing links to them. In addition, the music file-sharing services in Napster and Grokster were held contributorily liable because they allowed users to locate and obtain infringing material. Distinguishing these cases, the Visa majority argued that Visa’s services do not cause the infringing activities, and that making it easier to profit from infringement is not essential to the conduct of infringement.

Amazon instructed that “Google could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and failed to take such steps.” Dissenting Judge Kozinski argued that Visa’s acts were equivalent to those in Amazon. The majority, however, held that payment systems and search engines are not equivalent because creating a financial incentive for infringement involves “an additional step in the causal chain” beyond facilitating connection with an infringing site.

The dissent responded that the credit card payment system is, as a practical matter, essential, and that in any event the test for “materially contributing” is merely whether the activity “substantially assists” infringement. Kozinksi also maintained that there was no additional step between Visa’s activity and the direct infringement because payment is integral to one of the exclusive rights of copyright holders, “plaintiff’s right of distribution ‘by sale.’ 17 U.S.C. section 106(3).” “It’s not possible to distribute by sale without receiving compensation,” Kozinski argued, “so payment is in fact part of the infringement process.”

The majority noted that under the dissent’s reasoning, a utility company that provides electricity to the direct infringer would be held to have materially contributed to the infringement. After all, if a power company is given notice of an alleged infringement, it can take “simple measures to prevent further damage to ... copyrighted works,” namely, turning off the electricity.

A labyrinth of troubling issues concerning the “knowledge” element of contributory infringement would have to be threaded through if a broader class of enterprises is deemed to be materially contributing to infringing activity. For example, what if the alleged direct infringer has not created a counterfeit of the original work, but a work alleged to be “substantially similar”? What if fair use or protectability under copyright law poses significant issues?

By Perfect 10’s logic, when a copyright holder puts a supporting player on notice for a claim of infringement, that entity must terminate services to the alleged direct infringer or investigate and make a judgment about whether the claim appears meritorious. But what kind of investigation is required? And by what standard should a credit card company or utility be deemed to “know” that the accused is an infringer? Is it enough to defeat such knowledge that the alleged direct infringer makes a nonfrivolous argument of fair use?

Existing case law does not offer clear answers to these questions. But Congress, by providing safe harbors under the DMCA and immunity against various state law claims under the Communications Decency Act, powerfully signaled its policy determination that copyright holders must focus their policing efforts on the infringers themselves.

For vicarious liability, the defendant must have (1) the right and ability to supervise and control an underlying direct infringement from which it (2) obtains a direct financial benefit. Perfect 10 maintained that Visa had the right and ability to control infringement because the payment system allows the infringements to operate on a larger scale than they otherwise would. But, the majority held, that was insufficient. The dissent responded that Visa did have the right and ability to control infringement because its agreement with the charged websites reserved the right to require them to behave lawfully as a condition for obtaining Visa’s payment services.

The last judicial word has not been uttered on Perfect 10 v. Visa. Leaning heavily on Judge Kozinski’s vigorous dissent, Perfect 10 (supported by the usual suspects, the Motion Picture Association of America and the Recording Industry Association of America) has petitioned for rehearing and rehearing en banc. As of this writing, the petition is pending.

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